Jun 20, 2009

As sincere actuaries, we all think our decisions are made in a pure professional and rational manner. Upon our turn, the board we advise, takes decisions based on our 'objective' unbiased advices.

Too bad, nothing is less is true! Decisions are strongly influenced by the way we present our proposals.

Influenced DecisionsIn a splendid TED Video Presentation called 'Are we in control of our own decisions' (half an our fun and learning!) , Dan Ariely, an Israeli professor of behavioral economics and head of the eRationality research group at the MIT Media Lab, shows the astonishing effect of how decisions can be fundamentally changed by adding dummies in proposals:

First experimentAriely tested the next ad on the website of the Economist.com on a group of 100 MIT students:

As expected, most students wanted the combo deal (84%). Students can read, so nobody wanted the middle option.

But now, if you have an option nobody wants, you can take it off. Right? So Ariely tested another version of this ad on another group of students, eliminating the middle option. This is what happened:

Now the most popular option (84%) suddenly became the least popular (32%). And the least popular (16%) became the most popular (68%) option.

What happened was that the 'useless' option in the middle, was useless in the sense that nobody wanted it. But it wasn't useless in the sense that it helped people figure out what they wanted. In fact, relative to the option in the middle, which was get only the print for $125, the print and web for $125 looked like a fantastic deal. And as a consequence, people chose it.

The general idea here is that we actually don't know our preferences that well. And because we don't know our preferences that well we're susceptible to all of these influences from the external forces.

Second experimentPeople believe that when they see somebody, they immediately know whether they like that person or not. Ariely decided to put this statement to the test.

He showed his students a picture of Tom and a picture of Jerry (real people in practice). Then he asked "Who do you want to date? Tom or Jerry?" But for half the people he added a slightly less attractive (photoshopped) version of Jerry. For the other half of the students he added a slightly less attractive (ugly) version of Tom.

Now the question was, will ugly Jerry and ugly Tom help their respective, more attractive brothers?

The answer was absolutely YES. When ugly Jerry was around, Jerry was popular. When ugly Tom was around, Tom was popular.

Conclusions: The Dummy EffectWhat can we conclude from these two experiments?

When a board has to take a decision between two main proposals, their decision might be positively influenced by adding a third 'slightly less attractive version' (the dummy) of the proposal you - as an actuary - value as most favorable.

The danger that you - unaware of this dummy-effect - add slightly other proposals is substantial, as - in searching for the best decision - you'll be naturally inclined to add a few solutions nearby the optimal solution.

From now on...Now that you've become aware of this dummy-effect, your next board proposals will be 'cleaner' than before and 'undummied'. Also you'll have a more enriched look at third party (or employee) proposals that are on your or on your boards table. From now on your board advise will not only focus on the technical or actuarial matters, but also include a professional opinion about the way a proposal is structured and presented.

Disclaimer

Maggid is an actuarial professional, and like every actuarial professional or human being, he makes mistakes. Maggid encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong.

Nothing written here, or in my writings at Actuary-Info is an invitation to undertake whatsoever action, in particular to buy or sell any particular security; at most, Maggid is handing out educated guesses as to what the markets may do. Maggid thinks that "The markets always find a new way to make a fool out of you", and so he encourages caution with every action, in particular in investing. Risk control wins the game in the long run, not bold moves.

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